Mid-year change in capital gains tax likely

The Parthasarathi Shome panel's recommendation of abolishing short-term capital gains tax has thrown up various possibilities before the finance ministry including making amendment in the Finance Act, 2012, to implement it even before the next Budget.

Though a final decision on this will be taken by Finance Minister P Chidambaram after the committee appointed by Prime Minister Manmohan Singh to look at the General Anti-Avoidance Rules (GAAR) draft guidelines gives its final report by the end of this month, officials in the know of the developments indicated the possibility of bringing the change mid-way might also be explored.

Former chairman of the Central Board of Direct Taxes (CBDT) Sudhir Chndra said such an amendment mid-way in the financial year was possible and the government could bring the amendment to the Finance Act for this purpose in the winter session. Chandra added this could also be done through an ordinance, would be a good move to spur investment in the country.

Some tax experts, though, feel abolition of short-term capital gains was not a good idea as the government in that case would be removing the incentive for holding long-term assets.

They said that in case of an amendment to the Finance Act for abolishing the short-term capital gains tax, a prospective date for its applicability would also have to be announced and stressed that it would be difficult to pass the amendment in Parliament, especially in the current political scenario.

The committee has recommended the government should abolish the tax on gains arising from transfer of listed securities--be it in the nature of capital gains or business income--to both residents as well as non-residents. Further, to make the proposal tax-neutral, it has suggested the government consider increasing the rate of Securities Transaction Tax (STT) appropriately.

If the government cannot accept it, the panel has said a second best alternative would be to retain, until the abolition of the tax as mentioned above, the circular accepting the tax residence certificate issued by the Mauritius authorities.

Stakeholders indicated to the panel during deliberations that several countries did not tax gains from the transfer of listed securities and stressed that slowdown in the world economy had impacted investments into India. Foreign institutional investors make portfolio investments in listed securities on the Securities and Exchange Board of India guidelines. These transactions are subject to STT, and long-term capital gains on holdings for more than 12 months are exempt from taxation.

Short-term capital gains are taxable at 15 per cent.

According to the Shome panel draft report, present revenue from taxation of capital gains from such securities is less than Rs 3,000 crore.

"However, there would be some revenue foregone on account of non-taxation of short-term capital gains in the case of FIIs who avail treaty benefit (mainly India-Mauritius and India-Singapore tax treaties)," the committee has pointed out.

It has also stressed that a significant outcome of the present tax regime was that fund managers of foreign investors did not base themselves in India as the presence of fund managers would constitute permanent establishment of such investors in India and consequently, the business income of foreign investors would be taxed in India. The abolition of tax on portfolio investment may encourage fund managers to shift their bases to India.